Fast reading
- The UK government unveiled a borrowing plan that was lower than expected on Wednesday, which initially provided a degree of support for gilts. The Debt Management Office (DMO) contributed to market stability with shorter than anticipated total issuance planned for 2025/6.
- However, the Office for Budget Responsibility (OBR) warned that the UK still had limited headroom against risks to the outlook for UK productivity, interest rates, and global tariff policies.
- Elsewhere, the unexpected arrest of Istanbul mayor Ekrem Imamoglu last week sparked a major sell-off of Turkish assets, leading to a collapse in the value of the Turkish lira.
Lower-than-expected UK borrowing plans delivered a boost to government debt markets this week, but questions remain about the economy’s potential resilience to future shocks.
Gilt yields fell in the wake of the UK spring budget, following a lower-than-expected UK inflation print, and aided by the shorter issuance profile and the rebuilding of fiscal headroom.
Chancellor Rachel Reeves announced spending cuts as part of the Spring Statement, in a bid to restore the £9.9bn headroom. UK inflation slowed to 2.8% in February, after a 3% climb in January and coming in lower than the 2.9% that was anticipated1.
“In the UK’s Spring Statement, the government demonstrated its ability to rebuild fiscal headroom through approximately £10.5bn in spending and an additional £3.5bn from increased receipts, driven by positive growth from planning reforms,” says Orla Garvey, Senior Fixed Income Portfolio Manager at Federated Hermes Limited.
The Office for Budget Responsibility (OBR) has revised the 2025 growth forecast down to 1% (from 2%), with a recovery to 1.9% in 2026, supported by lower bank rates, reduced gas prices, and diminishing economic slack.
“While these forecasts temporarily bolster the fiscal outlook, the UK remains in the same place; any GDP shortfall could once again deteriorate the fiscal picture. More positively, the Debt Management Office (DMO) contributed to market stability. Total gilt issuance was shorter than anticipated, leading to a continued decline in the weighted average maturity of gilt supply. However, issuance forecasts have been revised higher for the later years, representing a drag on the market, requiring ongoing curve steepening,” she adds.
Any GDP shortfall could once again deteriorate the fiscal picture
Figure 1: Gilt yields rise again after initial decline
The DMO unveiled plans for £299.2bn of gilt sales in 2025 to 2026, with a shift away from longer-dated securities. Longer-dated debt accounts for 13.4% (£40.2bn) of the DMO’s latest plan, while medium-dated accounts for 30% (£89.7bn), and short for 37% (£110.9bn)2. This is the largest allocation to short-dated maturities since 19983.
The stability of gilts is contingent on the OBR’s forecasts materialising in a highly uncertain economic environment. A still fragile outlook led yields to climb higher on Thursday, with the OBR warning that the economy remains vulnerable to risks to the outlook for UK productivity, interest rates, and global tariff policies4.
Volatility rocks Turkish markets
The unexpected arrest of Istanbul mayor Ekrem Imamoglu last week sparked a major sell-off in Turkish assets.
The arrest of the leading opposition figure led to the biggest public protests in more than a decade, and instability quickly spread to financial markets, leading the Turkish lira down to a record-low against the dollar of 40.965.
The lira acted as the major shock absorber of the volatility, and its sell-off was only moderated by large scale intervention from the Central Bank of the Republic of Turkey and state banks.
The central bank made the call to hike the overnight lending rate by 200bps to 46% last week6, in a bid to help steady the situation. The bank said in a statement that it would be open to taking additional actions in order to maintain the sound functioning of financial markets, if necessary.
“If this is a prolonged bout of instability, then in the medium term, aggerate demand could be affected as the population postpone consumption and investment decisions,” says Mo Elmi, Senior Portfolio Manager for Emerging Markets Debt at Federated Hermes Limited.
“The main concern going forward is the potential dollarisation amongst locals. If this picks up and locals lose confidence in the lira, then we could see further currency weakness ahead. If the lira weakness is allowed to continue, we could see inflation spike as imports become more expensive in domestic currency terms,” he adds.
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1 ONS
2 DMO Debt Management Report 2025-26
3 Bloomberg
4 OBR: March 2025 Economic and fiscal outlook
5 Bloomberg
6 Central Bank of the Republic of Türkiye: Interim Monetary Policy Committee Meeting Decision (March 20)
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